Testing the predict power of VIX: an application of multiplicative error model

Luis Fernando Pereira Azevedo () and Pedro Valls Pereira
Additional contact information
Luis Fernando Pereira Azevedo: Escola de Economia de São Paulo - FGV e CEQEF - FGV

Brazilian Review of Finance, 2015, vol. 13, issue 4, 571-630

Abstract: VIX - Volatility Index - emerged as an alternative calculation of implied volatility in order to mitigate some problems encountered in models of the Black-Scholes. This kind of volatility is seen as the best predictor of future volatility, given that option traders' expectations are embedded in their values. In this paper we test whether the VIX has more predictive power for future volatility and contains relevant information not found in time series models time for non-negative variables, treated by multiplicative error model. The results indicate that the VIX has greater predictive power in periods of economic stability, but does not contain relevant information to the realized volatility which here is considered as the "true volatility". In periods of economic crisis the result changes, with the VIX presenting the same explanatory power, but contains relevant information in the short term.

Keywords: VIX; GARCH models; multiplicative error model; GMM (search for similar items in EconPapers)
JEL-codes: C10 C12 C13 G10 G15 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations:

Downloads: (external link)
http://bibliotecadigital.fgv.br/ojs/index.php/rbfin/article/download/57783/57453 (application/pdf)
http://bibliotecadigital.fgv.br/ojs/index.php/rbfin/article/view/57783 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:brf:journl:v:13:y:2015:i:4:p:571-630

Access Statistics for this article

Brazilian Review of Finance is currently edited by Marcio Laurini

More articles in Brazilian Review of Finance from Brazilian Society of Finance
Bibliographic data for series maintained by Marcio Laurini ().